Discovery (DISCA) Rides on Buyouts but Cost Woes Linger

On Sep 24, we issued an updated research report on Discovery, Inc. DISCA.

Discovery, a provider of original and purchased programming in the United States and more than 220 other countries and territories in over 40 languages, is gaining from increasing advertising and distribution revenues.

Notably, the stock has gained 42.1% year to date, outperforming the industry’s rally of 31.5%.

Factors Influencing the Stock

The completion of the Scripps buyout on Mar 6 in a cash and stock deal worth $14.6 billion (inclusive of the assumption of Scripps’ net debt of approximately $2.7 billion) is a positive for Discovery.

The acquisition not only expands Discovery’s product portfolio but also its international footprint. Moreover, the transaction is expected to be accretive to the combined entity’s adjusted earnings and free cash flow in the very first year.

Discovery's joint venture with TEN for automotive media marks the company’s entry into direct-to-consumer offerings. The company will take a majority controlling interest in the venture with the option to acquire 100% of the new venture. Discovery's decision to increase its stake in Oprah Winfrey Network is also a positive. We note that Discovery has inked multiple deals to expand its reach.

However, high costs continue to limit Discovery's bottom-line growth. Loss of domestic subscribers is also a major concern. With more consumers moving from cable subscriptions to online TV subscriptions, it remains a headwind for the company.

Nevertheless, the company’s acquisitions and partnerships are aiding top-line growth, which bodes well.

The company currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the broader technology sector include Vishay Intertechnology, Inc. VSH, Paycom Software, Inc. PAYC and NetApp, Inc. NTAP, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Vishay Electronics, Paycom Software and NetApp have long term-expected EPS growth rate of 9.2%, 25.5% and 14.1%, respectively.

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